"We live in a world that is finite. While there are huge amounts of
oil, gas, coal, and minerals (such as uranium, gold, silver, copper, and
lithium), we tend to extract the easiest to obtain, highest quality
resources first. Eventually, we find it is more and more expensive to
extract additional quantities of these items. Aquifers that are slow to
replenish become more and more depleted. Top soil tends to erode faster
than it is replaced. Pollution tends to be a problem too, with the most
obvious example being carbon dioxide added to air and water.

Economists have set up their economic models as if we would never
reach limits. In fact, we seem to be reaching limits now, especially in
the area of oil supply. World oil production has been approximately flat
for six years now (since the beginning of 2005), even as producers have
strained to raise production. OPEC claims to have a huge amount of
spare capacity, but there is little evidence that this is really the
case. They also claim to have very high oil reserves, but the reserves
have never been audited, and are believed by many to be seriously
overstated.

There is great confusion regarding what happens when we reach limits
in oil supply. People expect that if oil starts hitting limits, the
symptoms will be high prices and shortages. In fact, the symptoms as
often as not seem to be recession and an inability of would-be
purchasers to afford the goods that are being produced with the high
priced oil. This at times looks like an over-supply of oil–the opposite of what people expect.

The issue is not a lack of oil, but a lack of cheap, affordable oil.
If oil prices could rise high enough (and people’s pay checks could rise
to accommodate this increase in price), there would likely not be a
problem–we could just extract more higher priced oil. The fact that
things seem to work in this manner helps solve the mystery regarding how
there could be a huge amount of oil still in the ground, but oil supply
still not be growing.

Research suggests that once oil prices reach a high enough level (estimated by Steven Balogh
to be $85 barrel in 2009 $), high oil prices start sending the economy
into recession. Eventually, recessionary forces overcome the price rise,
and oil prices drop. In time, demand rises again, and oil prices rise
again, until the higher price once more leads to recession. This up and
down pattern leads to an oscillation of oil prices, never raising prices
high enough to really increase production. This failure of oil to reach
very high prices also means that “renewables” do not become competitive
either.

As noted above, world oil production has been approximately level
since the beginning of 2005. It seems to me that peak oil problems
started about the time that oil supply first stopped rising, and prices
started rising instead. Oil prices began rising as early as 2003, and in
2004, the Federal Reserve started raising target interest rates in
response to higher oil and food prices. Eventually, higher oil prices
and higher interest rates in response to the higher oil prices helped
prick the housing bubble. Thus, the debt defaults and recessionary
problems we have been experiencing in the past few years seem to be very
much related to limits in oil supply.

A
chart I made some time ago. It seems to me that our problems started
approximately when oil supply stopped increasing, represented by the
departure of the blue line from the green line. I am not convinced the
decline in oil production will follow the pattern shown in the graph.
This is just one idea.

We don’t know precisely when oil supply will start declining, but, in
a sense, it doesn’t matter. Having oil supply that doesn’t increase is
already a problem, because countries like China and India and oil
exporting nations are taking more and more of the available oil supply,
leaving less and less for developed nations like the United States.

Going forward, I expect that the we will see significant debt
defaults and more recession. Liebig’s Law of the Minimum (saying in
effect, that if we lose an essential input, then a whole process will
stop) is likely to mean that oil supply shortfalls are likely to have
much wider influences than their magnitude would suggest. One area that
is vulnerable is our financial system. It operates much better during
periods of economic growth (because it is easier to repay debt with
interest), and a reduction in oil supply is likely to result in economic
decline. If there are serious financial problems, international trade
is likely also to be adversely affected.

Eventually, I expect that collapse is likely. The timing is not
certain, but because of Liebig’s Law of the Minimum and the very
connected nature of our systems today (oil, electricity, food,
financial, international trade, Internet, medicine, etc.), it seems to
me that this collapse could take place in as little as 20 years. We
cannot of course know with certainty, but it seems to me that we should
be at least looking at this possibility, and planning accordingly.

Suggested Posts

I have tagged a number of posts as Introductory Posts. These can be
found by clicking the “Introductory Post” tag at the top of the right
sidebar, or by clicking Introductory Post here.

I might point out Our Finite World: Is this a Problem.
I wrote this back in early 2007, outlining some of my basic views. My
views have changed very little. You will note that even back then, I was
talking about the likely outcome of peak oil being recession and
problems with the financial system.

I have written quite a few posts related to financial issues
associated with peak oil, both at The Oil Drum and at Our Finite World.
Several of these are listed in at the Financial Implications link near the top of the right sidebar. Others include

One financial post that is on both blogs that should perhaps be mentioned is Delusions of Finance.
I correctly predicted many of the problems that took place in 2008, at
the beginning of 2008. This is a post explaining what I saw that others
did not.

A post which looks at the connection between oil consumption and employment is Part 1 of The Oil-Employment Link Part 1 and Part 2.
Part 2 looks at how this might play out, and what policies might be
appropriate. It is on the scary side, and might not be for new readers.